The market sold off early on Thursday, July 15, 2010, due to manufacturing indices showing significant slowing in growth offsetting a positive data point in new unemployment claims. Our short position was starting to look good. But by the end of the close, the S&P 500 closed up 0.12% to 1096.48. Driving the turn-around was news that Goldman Sachs (NYSE:GS) would settle an SEC suit related to its allegedly fraudulent sales of subprime securities. In addition, BP (NYSE:BP) released a statement that in a test it capped its deep-sea well in the Gulf of Mexico. This drove the markets higher in the last hour of the day.
In addition, in what we think could be the most important anecdotal news item of the day was the announcement that NBTY, Inc. (NTY) agreed to be acquired by the Carlyle group for $3.8 billion, for $55/share, a 47% premium over the previous day's price. We had previously pointed out the absurd implicit valuation in NTY at the close to $30/share in an intra-day tweet and in a follow up note on April 28, 2010.
This private equity acquisition is extremely important because it could indicate a growing risk appetite in the U.S. There are a number of small- and mid-cap companies that have a solid history in generating cash flow and ROIC, but have recently run into trouble. These could be the next takeover targets. The first targets that come to mind are the for-profit education companies. Like NBTY, Inc., companies like DeVry, Inc. (NYSE:DV) have once had good track records of improving ROIC trends, but have severely sold off in recent months. In DeVry's case, one has to wonder. Where some politicians think of the word "scam", some private equity firms may be thinking "opportunity" and "value." Incidentally, we also mentioned Devry in a note on April 28.
If you subscribed to our newsletter, you would be able to compare the quantitative profiles of NBTY, Inc. to Devry, Inc. You would see that the similarities are eerie.
Today, we look forward to hearing from Citigroup (NYSE:C) and Bank of America (NYSE:BAC), as well as our good friends Gannett (NYSE:GCI) and Mattell (NASDAQ:MAT), which are up 12.3% and 8.7%, respectively, since appearing in our June 30, 2010 quality ranking and model portfolio report.
Incidentally, our quality ranking and model report is available as a subscription with monthly, weekly and daily updates. Contact me for details.
Ascendere Long/Short Strategy Daily Update
For the day ended July 15, 2010 our selected basket of 40 'high-quality' stocks rose 0.19% and our selected basket of 37 'low-quality' stocks rose 0.05%. This compares to a rise of 0.12% in the S&P 500.
For the MTD, the 'high-quality' stock basket is up 6.14%, behind of the S&P 500 (excluding dividends) at 6.38%. The 'low-quality' stock basket is up even more for the MTD at 5.52%. A 77-stock Dollar Market Neutral Portfolio composed from these two baskets of stocks increased 0.14% for the day and is now up 0.57% for the month.
From these baskets of stocks we select the optimal combination for our model portfolio strategies. This report refers to model portfolios last rebalanced as of the close of June 30, 2010.
Dollar Market Neutral Model Portfolio
A Dollar Market Neutral Model Portfolio created from our base quality models increased 0.47% yesterday with 15 stocks in the long model up 0.22% and 14 stocks in the short model down -0.25%. For the MTD, the overall model portfolio is now up 0.29%, with the long portfolio up 3.50% and the short portfolio down -3.19%.
Unleveraged Strategy: Long Stocks and Inverse ETFs
Our long stock and inverse ETF model is currently 0% long stocks and 100% long inverse ETFs*. When long, this strategy tends to go long a different basket of 'high-quality' stocks than the other models. This model declined -0.06% overall for the day and is now down -4.65% MTD versus up 6.38% for the S&P 500, excluding dividends.
Leveraged Strategy: Long and Short Stocks
Our 2x Leveraged Long/Short Model Portfolio, which is based on the stocks in our Dollar Market Neutral model, is currently 0% long and -200% short. As a result, the overall portfolio appreciated 0.51% overall for the day. This model portfolio is now down -6.42% MTD versus up 6.38% for the S&P 500, excluding dividends.
'High-Quality' Long Stocks Performance
The best daily performer in the 'high-quality' model portfolios was up more than 2.7% and the worst was down more than -2.5%.
'Low-Quality' Short Stocks Performance
The best daily performer in 'low-quality' model portfolios was down -2.22% and the worst was up more than 4.8%.
Our Long/Short indicator is still net short. This indicator tends to work well in trending markets and less so in sharply choppy markets.
About the Model Portfolio Strategies
Ascendere Associates runs three model portfolios based on combining optimal baskets of "high-quality" and "low-quality" stocks, which are determined by proprietary and third-party factors, such as from ValuEngine. The strategies include a Market Neutral model, Unleveraged Stock and Inverse ETF model, and a Leveraged Long/Short strategy. Long and short weights are determined by a simple, proprietary technical indicator.
Investors focusing on daily performance could find monitoring our model portfolio useful as a proxy for what is working in the market in general as viewed through the lens of "high-quality" versus "low-quality" stocks, and use our stock ideas as the basis of further stock-specific research or with their own market-timing strategies.